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Comment by rahimnathwani | Hacker News Reader

I'm not sure I understand your point.

Let's say I run a lemonade stand as an individual, and this year the stand makes a profit of $100,000. Let's say individual income tax is 30%. I'd pay $30,000 tax, right? So I'd be left with $70,000 in my pocket.

What if I had decided to set up the lemonade stand as a corporation instead? The corporation would pay some sort of profits tax (say 20%, so $20,000). There's now only $80,000 for me. But I have to pay personal tax of 30% of the $80k, so in this scenario I walk away with only $56k.

Why should the total tax take in the two scenarios be different?

How could I change the second scenario, to preserve the corporate structure, but maximise the money in my pocket?

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If you paid out the profit of the corporation as a dividend, and you have owned the corporation for a long time* so those are “qualified dividends” in the US, and your ordinary income tax rate is 30%, then you only pay 15% tax on those dividends. That leaves you with $68k, or only slightly less than the other scenario.

(The required holding period is 60 days during the 121-day period that begins 60 days before the ex-dividend date.)

> What if I had decided to set up the lemonade stand as a corporation instead? The corporation would pay some sort of profits tax (say 20%, so $20,000). There's now only $80,000 for me. But I have to pay personal tax of 30% of the $80k, so in this scenario I walk away with only $56k.

Wages are a pre-tax expense for the corporation.

Why shouldn't you pay more for receiving the liability benefits of a corporation?

Why should the total tax take in the two scenarios be different?

Why shouldn't they? They are two different situations. Different situations can lead to different outcomes.

The two situations are economically identical. The economic activity is the same. The same amount of profit has been made in each case.

EDIT: Yes, I realise that corporations have specific legal attributes/benefits. However, taxing their profits twice doesn't seem (i) fair, or (ii) likely to provide good incentives.

A corporation is not just a label. A corporation carries a number of legal obligations and protections. If you want those legal obligations and protections, you pay the price for having them. If you don't want them, don't become a corporation.

The fact that the situation appears economically identical is irrelevant, and actually they're not economically identical. Doing business with a corporation is very different to doing business with an individual, because of those obligations and protections.

As another contrived example, stealing ten dollars from someone is economically identical to having that person gift you ten dollars, but they're not remotely the same thing.

You are right that we must pay the price for any legal protections afforded to corporations. I agree that, today, double taxation is part of that price. However, I believe that double taxation should _not_ be part of that price. The two examples I gave should be taxed in the same way. Sure, the corporation scenario may have some additional administration and filing fees, but I don't believe the poor shareholder should pay almost twice as much tax, just to get the protections afforded by a limited liability structure.

You are right that the situations are not economically identical. That was not a useful over-simplification on my part.

Someone drinks your lemonade and has a heartattack. The family sues the corporation and wins millions. However your corporation is a limited-liability entity and so files for bankruptcy.

Your personal income and savings, paid as wages, are immune to bankruptcy proceedings. The corporation loses its cash and holdings, but you don't lose your house.

This is a staggering fiscal and economic advantage. You absolutely should be paying a lot for it given the net effect on everyone else.

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